Credit Market Daily #8

01-Sep-22

Pinch, Punch First of the Month! The markets are definitely feeling as if they have been pinched and punched all over.

We closed at 588 in Xover and have already touched 608 this morning on the open and since drifted around the 600 area.

We see some risk of capitulation here as Credit, Rates and Equity have very little to cheer about – the largest positive catalysts are all in the fiscal realm providing relief to consumers and businesses. The flip side of this is obviously an increase in government borrowing when rates are already rising.

There is a good article from tthe FT outlining Europe’s options to deal with rising enery prices here.

It comes as the paper also reports that German’s mid side corporates are having to slow or stop production in the face of higher energy prices.

Central banks suprising on the Dovish side or more concrete signs that economies are slowing (BaD NEwS iS GoOd NeWs) are Known Uknowns that may also help near term.

Point in case, we have the now totemic Non Farm Payrolls which may provide an excuse for markets to take a breather/ rally.

In terms of perfromance -the Bloomberg Barclays European HY index declined -0.53% on the day, single Bs playing catch up down -0.6% vs. down -0.52% for BBs. CCCs actually outperfromed down -0.34% but in all likelihod this is more a reflection of their illiquidity than anything else.

The Bloomberg Barclays US High Yield Index was down -0.44%, again with single Bs underperfroming BBs. USD HY ETFs lost -0.55% on the day. The CDX – closed yesterday at a spread of 533 +5 on the day and is 35bps wider on since Friday’s close. This compares to Xover which was 29 wider as of yesterday’s close and 39 wider as of this morning.

Equities are a sea of red at time of writing and it certainly looks as if time has been called on the recent bear market rally – there will likely be another “the Rally is dead, long live the Rally” – just not this week.

US Equity Futures are also pointing lower.

The Red Sea:

ECB to Hike 75bps next week?

The strong Eurozone CPI yesterday saw a number of US banks increase thier expected rate hike from the ECB to 0.75% from 0.5%.

“The debate is highly complex, but the mix of recent communication paired with the August upward surprise in headline, and especially core inflation, means a bigger move than in July has now become marginally more likely,”

Goldman Sachs Economics via Bloomberg

The task facing the ECB is not an enviable one and this chart below from Bloomberg highlights how different memberstates are experiencing very different (albeit higher) consumer inflation:

The full article is here. As mentioned above any dovish surprise, would likely be supportive of Equity markets.

Recession Acceptance

Yesterday we pointed to oil coming off the boil and it has continued lower. I cam across a great quote in the WSJ article “Oil Posts Third Straight Month of Declines” – an energy analyst was explaining the decline in oil prices : “The oil market is going from recession fears to recession acceptance”.

It strikes me that markets are not only accepting a recession but also that a recessions and hiking rates are not mutually exclusive and infact central banks are willing to kill or cure when it comes to inflation.

GBP Investment Grade Yield hits 5%

Bloomberg reports:

“An index of top-rated sterling securities, the bulk of which belong to companies based in the UK, was quoted at a
yield of 5.007% on Aug. 31, the highest level since May 2012. The surge in yields widened the gap between
sterling and euro notes, driving the increase in costs last month for short-dated UK corporate credit to the biggest
in 13 years, Bloomberg indexes show”

Bloomberg News “British Firms’ Borrowing Costs Pass 5% for First Time in Decade” 01/09/22

Whilst Yields in GBP Investement Grade have topped 5% – the headline “British Firms’ Borrowing Costs Pass 5% for First Time in Decade” is a little misleading as the number of companies that likely have to refinance or want tor refinance at this juncture is low and we are talking about an index here so this is the average yield at the average maturity.

Nevertheless – with the BOE expected to hike significantly borrowing costs for companies WILL go up. This is captured by the second chart from the article that shows the yield differential between European and GBP corporate bonds has increased particularly in the short end, excaerbated by curves flattening.

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